Sunday, May 12, 2013

A decade after first being proposed, China, Japan and South Korea have finally kicked off negotiations on a trilateral free trade agreement (FTA). They made small but meaningful progress in their first round of talks in Seoul in late March as they seek to lay the groundwork for continued growth of their region based on mutually advantageous trade and investment.

The three countries adopted negotiation rules, agreed on the range of topics and basic guidelines on concessions. They have decided to carry out both bilateral and trilateral talks for merchandise goods, while engaging in trilateral talks for services, investment, and regulation.

They came to terms quicker than expected in the first talks, demonstrating how much hope and anticipation is riding on the trade deal, dubbed the China Japan Korea (CJK) FTA. Talks between the east Asian neighbours come amid a slew of moves to lower trade barriers, even as the three countries transitioned to new political leaderships.1 The negotiations will eventually move to Beijing and then a third round will be held in Tokyo later this year.

China, Japan and South Korea are Asia’s largest, second largest and fourth largest economies, respectively. A tripartite deal would give rise to a super economic bloc of 1.52 billion people, accounting for roughly 17.43% of global trade and 20.44% of the world’s gross domestic product (GDP).2 It will be the world’s third largest regional market, smaller only than the North American Free Trade Agreement (NAFTA) and the European Union (EU). The government–sponsored collaborative feasibility study carried out by researchers from the three countries3 has noted that there is some convergence and complementarity in the trade structures, demonstrating a similar layout of industries engaging in exports and imports and considerable flows of intermediate goods.

The intra-regional trade patterns among the three countries have also evolved significantly in recent years. This may constitute a good rationale for a trilateral FTA, since it can enhance the competitiveness and efficiency of the three countries by increasing competition, thereby facilitating the restructuring of industries and making a vertical and horizontal division of labour more efficient. In addition to this, there will be benefits for the consumers as well in the form of lower prices and access to a wider range of products, and the improved opportunities afforded to exporters through access to markets will in turn stimulate greater economic activity.

However, even as the talks have just begun, many observers are not sure that a deal will eventually be signed. There are a variety of hurdles to overcome, and politically important constituencies need to be accommodated in all the three nations. Historical problems and their traditional rivalry, coupled with territorial disputes may make it even harder.

Background of Talks

There are at least three fundamental factors that have led to the growing number of FTAs in east Asia since 2000. They include the Asian financial crisis; the rising trends on market-driven economic integration; and the progress of European and North American economic integration (Masahiro Kawai and Ganeshan Wignaraja 2008).

The financial crisis of 1997-98 helped east Asians to understand the importance of economic integration. The Association of South-east Asian Nations (ASEAN) + 3 (CJK) summit has been held every year since the first ASEAN + 3 summit in Kuala Lumpur, Malaysia in December 1997. Also, minister-level meetings such as the foreign ministers meeting, the finance ministers meeting, and the senior officials’ meeting have been held regularly since 2000.

Furthermore, they have been actively promoting bilateral agreements, which created an effective pathway to gradual regional economic integration in east Asia. The Japan-Singapore Economic Partnership Agreement (EPA), concluded in 2000, became the first FTA in the region. Two years later, China signed its first FTA with ASEAN. The same year, Japan launched bilateral negotiations with South Korea, but the talks were suspended after the sixth round.4 It was not until 2004, that South Korea signed its first ever FTA, with Chile.

Soon after, there was a steep rise in the number of FTA deals that the three nations separately signed with regional and outside countries.

The conduct of China, Japan and Korea is distinctly different in course of their FTA negotiations. Whilst Japan and Korea sought to negotiate comprehensive FTAs with selective countries bilaterally, China adopted a more pragmatic and flexible approach to negotiate “shallow” FTA agreements (Junji Nakagawa and Wei Liang 2011).

South Korea is more aggressive, having signed deals with Chile (2004), European Free Trade Association (EFTA) (2004), Singapore (2005), ASEAN (2007), USA (2007, ratified in 2011), India (2010), EU (2011), Peru (2011), Turkey (2012) and Colombia (2013). Talks are under way with Canada, Mexico, GCC, Australia, New Zealand, Vietnam and Indonesia. China and South Korea launched negotiations on 2 May 2012, but soon faced difficulties over the scope of coverage and not much progress has been made.

As can be seen from the above list, while they have individually been successful in arriving at FTA deals with other nations, they have somehow not been very successful in bilateral deals amongst themselves. They hope that, given the ground reality, a trilateral deal may help them sort out their differences.

Chinese Premier Zhu Rongji first proposed exploring the possibility of a Northeast Asian FTA in 2002. The proposal was largely gathering dust, until China took a proactive stance last year perhaps to secure leadership in northeast Asian economic integration and counter the Trans-Pacific Partnership (TPP) Agreement led by the US.5

The rapid movement of the TPP agenda has caused China some disquiet, and it is actively promoting regional economic integration with 16 partner countries – three north-east Asian nations, ten ASEAN members, and Australia, New Zealand, and India – as well as a tripartite FTA to build a sturdier free trade bloc in the Asia-Pacific region.

Many Chinese policymakers and scholars consider the TPP agenda as a force that could rip apart the regional economic integration of east Asia. Moreover, a strong voice in Chinese academic and policy circles maintains that the main reason behind the Obama administration’s support for the TPP agenda is a desire to use it as a tool to economically contain China’s rise(Guoyou Song and Wen Jin Yuan 2012).

To counter-balance the US initiative, China is actively pushing for its own FTA agenda, in particular trying to move forward on the trilateral FTA, ultimately seeking to construct a regional web of its own free trade agreements.

It helps that Japan’s new government has shifted its trade policy by becoming more enthusiastically involved in free trade. In addition, Korea already has free trade accords with lucrative markets of the EU, US and ASEAN and now wants to go beyond bilateral trade deals and seek regional FTAs.

A multilateral forum could be more engaging for Tokyo and Seoul, as they bargain more options to contain China’s influence.

Geopolitical Fault Lines

While there is optimism in the air, worrying geopolitical fault lines still exist in the region. The three countries share a long and bitter history of antagonism and warfare.

Korea and China share a deep anger towards Japanese atrocities during the second world war and the continued lack of official recognition or apology. Koreans are still troubled by centuries of domination by Chinese dynasties followed by a ruthless occupation by Japan and attempts at forced assimilation. More recently territorial disputes over the sovereignty of a few islands have strained relations even further.6 Any future provocations will jeopardise talks.

Another major obstacle is that each country has its vulnerable sectors and each use not only tariff barriers but also non-tariff barriers to protect their weakly competitive industries. It will not be surprising if vocal farm lobbies in all three countries, particularly Japan and South Korea, vigorously oppose attempts to dismantle subsidies that enable them to earn a living.

An FTA would raise concerns in Japan and Korea for serious impacts on domestic agricultural production. Both nations have officially indicated that it would have asymmetrical effects on the trilateral agricultural trade and possibly lead to an uneven distribution of benefits in the agricultural sector of the three countries.

Then we have a very large sector of, small and medium enterprises, which are less competitive than conglomerates in all three nations. An FTA adds pressure on those engaged in these industries.

Last but not the least, North Korea remains a potential spoiler to continued economic growth and political stability in east Asia. The ongoing negotiations can also be easily interrupted by any flare-up in political tensions. Japan and South Korea would prefer to pressure China to control North Korean rhetoric, before they can even sit down once again to discuss economic cooperation.

Notes

1 Xi Jinpeg became China’s president, on 14 March 2013, in a confirmation vote by the 12th National People’s Congress in Beijing. Shinzo Abe assumed office as Japan’s prime minister on 26 December 2012. Park Geun-hye was sworn in as South Korea’s first female president on 25 February 2013.

2 As per World Bank Data and Trade Statistics compiled by the World Trade Organisation, in 2011, the combined GDP of the three countries was $14.31 trillion, with their total trade valued at $ 6.398 trillion

3 From 2003 to 2009, a Trilateral Joint Research Project was commissioned by the three governments, and conducted jointly by the Development Research Center (DRC) of the State Council of China, the National Institute for Research Advancement (NIRA) of Japan, and the Korea Institute for International Economic Policy (KIEP). The joint report was published on 16 December 2011. (http://www. meti.go.jp/press/2011/03/20120330027/20120330027-3.pdf.)

4 The FTA negotiations between Seoul and Tokyo have been suspended since November 2004, mainly because of Japan’s reluctance to lower tariffs on agricultural goods.

5 The TPP is a multilateral free trade agreement that aims to liberalise the economies of the Asia-Pacific region involving Australia, Brunei, Canada, Chile, Malaysia, Mexico, New Zealand, Peru, Singapore, the United States and Vietnam. On 12 November 2011, the leaders of these nine TPP partner countries announced the broad outlines of an expanded TPP: it will promote innovation, enhance economic growth and development, and support the creation and retention of jobs among the nine dynamic Asia-Pacific economies. Further negotiations are still underway, with Japan, Canada, and Mexico also having demonstrated a strong interest in joining.

6 Tokyo and Beijing contest ownership of a chain of islands called Diaoyu in China and Senkaku by Japan. Seoul and Tokyo also disagree on the sovereignty of two rocky islets the Koreans call Dokdo and known in Japan as Takeshima. In addition both Japan and South Korea are exasperated by the intrusions of aggressive Chinese fishing vessels into their waters.